Detailed Notes on Financial Accounting

# Detailed Notes on Financial Accounting

## 1. Meaning, Scope, and Importance of Accounting

### **Meaning**

Accounting is the systematic process of identifying, recording, classifying, summarizing, and

interpreting financial information to aid decision-making.

### **Scope**

1. **Financial Accounting**: Focuses on preparing financial statements for external users.

2. **Cost Accounting**: Involves determining and controlling costs of production or services.

3. **Management Accounting**: Provides financial data for internal decision-making.

4. **Tax Accounting**: Deals with tax-related matters and compliance.

### **Importance**

- Provides financial insights to stakeholders.

- Ensures compliance with legal regulations.

- Aids in budgeting and forecasting.

- Helps evaluate financial performance.

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## 2. Branches of Accounting

1. **Financial Accounting**: Recording and summarizing transactions to prepare financial

statements.

2. **Cost Accounting**: Analyzing costs for efficient management of resources.

 Detailed Notes on Financial Accounting

3. **Management Accounting**: Internal focus to aid managerial decisions.

4. **Auditing**: Verification of financial records to ensure accuracy and compliance.

5. **Tax Accounting**: Preparation of tax returns and compliance with tax laws.

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## 3. Accounting Concepts and Conventions

### **Concepts**

1. **Going Concern**: Assumes the business will continue to operate.

2. **Accrual Basis**: Revenue and expenses are recognized when they occur.

3. **Matching Principle**: Expenses should match the revenues they generate.

### **Conventions**

1. **Conservatism**: Recognize anticipated losses, but not gains.

2. **Materiality**: Focus on information that influences decision-making.

3. **Full Disclosure**: All material information should be disclosed in reports.

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## 4. Double Entry System

1. **Definition**: Each transaction has two effects ? debit and credit.

2. **Rules**:

- **Personal Accounts**: Debit the receiver, credit the giver.

- **Real Accounts**: Debit what comes in, credit what goes out.

- **Nominal Accounts**: Debit all expenses and losses, credit all incomes and gains.

3. **Benefits**:
 Detailed Notes on Financial Accounting

- Ensures accuracy.

- Facilitates preparation of financial statements.

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## 5. Journal and Subsidiary Books (Including Cash Book)

### **Journal**

- Book of original entry where transactions are recorded chronologically.

### **Subsidiary Books**

1. **Purchase Book**: Records credit purchases.

2. **Sales Book**: Records credit sales.

3. **Cash Book**: Records all cash receipts and payments.

4. **Purchase Returns and Sales Returns Books**: Record returns of goods.

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## 6. Ledger and Trial Balance

### **Ledger**

- Classification of journal entries into accounts.

- Helps determine balances for financial statements.

### **Trial Balance**

- Prepared to check the arithmetical accuracy of ledger balances.

- Ensures total debits equal total credits.

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## 7. Final Accounts of Sole Traders and Partnership Firms

1. **Trading Account**: Calculates gross profit or loss.

2. **Profit & Loss Account**: Determines net profit or loss.

3. **Balance Sheet**: Displays the financial position of the business.

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## 8. Distinction Between Capital and Revenue Items

1. **Capital Expenditure**: Benefits future periods (e.g., buying machinery).

2. **Revenue Expenditure**: Incurred for day-to-day operations (e.g., salaries).

3. **Capital Receipts**: Non-recurring and long-term (e.g., loans).

4. **Revenue Receipts**: Recurring and short-term (e.g., sales revenue).

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## 9. Depreciation Methods (AS-6)

1. **Straight-Line Method**: Equal depreciation annually.

2. **Reducing Balance Method**: Depreciation is higher in the earlier years.

3. **Sum-of-Years-Digits Method**: Accelerated depreciation.

4. **Units of Production Method**: Based on asset usage.

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## 10. Bank Reconciliation Statement (BRS)

 Detailed Notes on Financial Accounting

- Matches the cash book with the bank statement.

- Identifies discrepancies such as:

- Outstanding cheques.

- Bank charges not recorded in the cash book.

- Errors in recording transactions.

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## 11. Accounts Relating to Partnership

1. **Admission of Partner**:

- Revaluation of assets and liabilities.

- Adjustment of goodwill.

- New profit-sharing ratio.

2. **Retirement or Death**:

- Settlement of retiring/deceased partner?s dues.

3. **Dissolution**:

- Realization account to settle liabilities and distribute assets.

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## 12. Amalgamation of Firms and Sale to a Company

1. **Amalgamation**: Two or more firms combine to form a new entity.

2. **Sale to Company**:

- Transfer of assets and liabilities.

- Consideration is paid in shares or cash.

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## 13. Gradual Realization of Assets and Piecemeal Distribution

1. **Gradual Realization**: Assets sold in stages.

2. **Piecemeal Distribution**: Distributed to creditors and partners based on priority.

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## 14. Consignment Accounts

1. **Consignor**: Sends goods to consignee for sale.

2. **Consignee**: Sells goods on behalf of the consignor and earns commission.

3. **Accounting**:

- Record expenses and income related to consignment.

- Maintain stock records with consignee.

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## 15. Joint Venture

- Temporary partnership for a specific project.

- Methods of Accounting:

1. Separate set of books.

2. Memorandum joint venture account.

3. No separate books (entries in individual accounts).

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## 16. E-Accounting

### **Meaning**

- Use of computerized systems for maintaining accounts.

### **Features**

- Automation of repetitive tasks.

- Accuracy and efficiency.

### **Tally ERP 9**

- Phases: Configuration, Voucher Entry, Report Generation.

- Accounts Masters: Create and manage ledgers and groups.

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## 17. Corporate Accounting as per Companies Act, 2013

1. **Shares**:

- Issue, forfeiture, and reissue of shares.

- Bonus and rights issues.

2. **Debentures**:

- Issue and redemption.

3. **Final Accounts**:

- Managerial remuneration.

- Consolidated financial statements.

4. **Amalgamation and Reconstruction**:

- Accounting for mergers and internal restructuring.

5. **Liquidation**:
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- Preparing liquidation accounts.

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## 18. Management Accounting

### **Meaning and Objectives**

- Focuses on providing information to management for decision-making.

### **Functions**

1. Budgeting.

2. Cost Control.

3. Performance Evaluation.

### **Role in Decision-Making**

- Helps in planning and strategic implementation.

- Evaluates financial health through ratio analysis and forecasts.